What To Make of Bitcoin?

Money Quote Dec. 8th 2017

Besides money, that is.

Bitcoin price history (one year) as of Dec. 8th, around 2pm PT.

I wasn’t planning on writing about Bitcoin/blockchain today, but it’s on everyone’s mind as we close the week. From the coverage I’ve got stacked up in my browser tabs after a morning of perusing the more interesting stories from the past few days, it’s clear we’re all obsessed. So instead of the regular mix of six or seven unrelated stories, I’m going to focus today’s Money Quote column on our favorite speculative bubble, and see what sense we can make out of it, including some background reading. Given that Bitcoin futures trading officially starts next week, it seems a bit of weekend study is in order. Onwards…

I can’t vouch for the integrity of all the information in this long and clearly detailed overview, but it’s been shared widely on Medium and helped me make sense of some of the finer and more technical points around Bitcoin’s architecture. The piece covers many of the technology’s limitations, affordances, and potentials, and is a good place to start if you’re familiar, but not deeply literate in the space.

This is a slightly older (last month) piece that is worth grokking if you want to go deep on the more wonky but crucial issues around blockchain, with a focus on governance across the two largest currently viable blockchain use cases: Bitcoin and Ethereum. It them goes into novel approaches to governance with plenty of examples. Eye opening. MQ: “As with organisms, the most successful blockchains will be those that can best adapt to their environments. Assuming these systems need to evolve to survive, initial design is important, but over a long enough timeline, the mechanisms for change are mostimportant. As a result, I believe governance is the most vital problem in the space.”

As we move from explainers to news, a Times story profiles the company at the center of the Bitcoin frenzy. Love this quote: “Recently, every last inch of space has been pressed into action. The day after Bitcoin hit $10,000 last week, a training session for Coinbase managers was moved to the game room because the engineering team needed to set up an emergency war room in the regular conference room. The engineering team was trying to get Coinbase back up after the company’s site was knocked offline, overwhelmed by a wave of incoming traffic.”

And what might kill bitcoin? Not servers melting down — unless the fire was started by the government. MQ: “And if you think central powers can’t do major damage to crypto, think again. They wield the ultimate power: The violence hack. That’s power to kill you or put you in jail.”

If you think Bitcoin is immune to old school Wall St. practices, this piece would like to disabuse you of that notion. MQ: “Bitcoin was supposed to disintermediate the finance industry — the system of banks and middlemen and transaction fees in which a single entity can hold your money hostage. Instead, it replicated this system and made it worse. Ordinary users all trust third parties to verify transactions and hold their money. The price is so volatile that no one wants to use Bitcoin for payments. And thanks to the current bubble, the electricity required to maintain the Bitcoin network is skyrocketing.”

And here comes Wall St. This is a big deal, and I have no idea how it’s going to play out. Shorts will bet the currency will crash, creating a huge incentive for the currency to do just that. But then again, someone buys those shorts….the game is truly afoot. MQ: “It’s true that the possibility of getting exposure to this mysterious asset that is producing outstanding returns on a regulated and liquid exchange will no doubt entice serious money to take a bitcoin punt. Many funds that are by charter prohibited from dealing in “alternative assets” on unregulated exchanges will now be able to participate. And the opportunity to leverage positions (get even more exposure than the money you’re putting in would normally warrant) to magnify the already outrageous returns will almost certainly attract funds that need the extra edge. But here’s the thing: the money will not be pouring into the bitcoin market. It will be buying synthetic derivatives that don’t directly impact bitcoin at all.”